Op Ed by Frank Weil: A two track global economy
Op Ed by Frank Weil
Terms like single scoop and double dip are normally only heard in ice cream shops. But, at the moment the economic and financial pages of news organizations the world over are using these types of terms to try to predict and explain what is going on “out there”. Indeed what is going on is unusual and defies categorization in conventional ways.
The underlying problem causing this confusion is that the circumstances out of which today’s conditions arose were quite different from anything that ever came before. Of course, a lot is the same but the several important differences account for what appears to be an entirely new scenario. Historically economies have generally risen and fallen more or less in sync at least in given countries and a lot of the time around the globe. For example, it was said for a long time that when the US sneezed, Europe would get pneumonia. No longer, it appears to be the case, despite the fact that information flows more completely and rapidly than ever before and those flows in fact do create feedback loops which normally would knit all economies more closely together.
The several important differences which may account for why the economic world is behaving in a brand new way include the following:
–The casino effect is much larger than ever before. The casino effect is the scale and depth of financial transactions as a share of GDP. Even though, since the credit meltdown in 2008, banks have started lending again, they are not doing so at previous levels. As a result, the rest of the economy which had depended on cheap and easy money has not been as robust as normally is the case for an economy rebounding from a recession.
–The big powerful companies have an enormous store of cash in part because they slowed inventory accumulation and capital spending during the lowest points of the recession.
–Employment has been unusually slow to come back probably because it had been allowed to grow too much and fast in the run up to the recession and because post recession the bigger employers found they could grow again with fewer employees and the smaller employers still could not afford to put people back on their payrolls.
–People who remain employed and whose savings/investments had rebounded nicely between 2008-2010 began to spend again out of proportion to the population as a whole. For example, Apple sold several million iPads for several hundred dollars apiece to people who already had smart phones and computers. Go figure?
–The stimulus package which was applied so relatively quickly and early (and brilliantly) in the recession evidently had both an immediate effect and a drawn out promise, which had different effects at different times on the economy at large. That echoing process probably accounts for the broad confusion about the benefits of the stimulus like the three blind men and the elephant, each of whom reported a very different story on which part of the elephant he felt.
Those differences appear to add up and account for what we see today, which is less a prospect for a double dip, or whatever, but really boils down to a two track economy. One track is carrying the businesses and people who were relatively unscathed by the recession. The other track is carrying the businesses and people who have yet to recover completely from the recession. It is not surprising that the two tracks run at different speeds at different moments, which may account for the appearance of the economy as a whole seeming to be slowing or speeding up.
What we may need to do more of is recognize the increasing significance of the two tracks and follow them more closely. One of the other factors is that it also appears that the separate tracks seem not to much effect the other, which means that the strong track may not help the weak track recover as fast as in the past when the economy was more integrated.
In all events it appears we are looking at quite a slow, long term recovery which will leave us with all the nettlesome troubles of very low employment, limited growth in personal income and spending as well as cautious capital spending. Perhaps we need a period of regrouping and refinding our bearings after such a powerful and widespread period of growth and overspending on too much borrowed money.
The Beaufort Tribune is pleased to welcome Frank Weil as a guest columnist. Frank Weil is the Chairman of Abacus and Associates, Inc., a private investment firm in New York, NY. October 1979 – June 1983 he was a senior partner of the Washington law firms of Ginsburg, Feldman, Weil and Bress, chartered, and Wald Harkrader and Ross. Mr. Weil headed the International Trade Administration of the United States Department of Commerce 1977 – 1979. He was Chairman of the Finance Committee and Chief Financial Officer of the investment firm of Paine, Webber Inc. 1972 – 1977. Mr. Weil has served on the for-profit boards of directors of MirrorWorldsTechnologies; SyVox Corporation; Exxel Container, Inc.; Geico Corp.; Paine Webber, Inc.; Cambridge Royalty, Inc.; Dorr-Oliver, Inc.; Hamburg Savings Bank, NYC; J.B. Lippincott Company, Philadelphia; and Victory Mutual Funds, Cleveland.
Click here to read all of Frank Weil’s columns in The Huffington Post.
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